List of Different Forms of Salary for Computation of Income under the head 'Salary'

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Basic Salary

Taxable.

Dearness allowance / Pay

Taxable.

Advance Salary

Taxable in the year of receipt.

Arrears of Salary

Taxable in the year of receipt, if not taxed on due basis earlier.

Leave Encashment while in Service

Taxable.

Leave encashment at the time of retirement or at the time of leaving the job

1. In case of Government employees. it is fully exempt from tax.

2. in case of non-Government employees, it is exempt from tax to the extent of the least of the following:

   1. Cash equivalent of leave salary in respect of the period of earned leave at the credit of employee at the time of retirement (which cannot exceed 30 days’ “average salary” for every completed year of service); or

   2. 10 months “average salary; or

   3. Amount specified by the Government, i.e., Rs. 3,00,000; or

   4. Leave encashment actually received at the time of retirement.

Salary in lieu of notice

Taxable

Salary to Partner

Not chargeable under the head “Salaries” but taxable under the head “Profits and gains of business or profession”.

Fees and Commission

Taxable.

Bonus

Taxable on receipt basis if not taxed earlier on due basis.

Gratuity

1. In case of Government employee it is fully exempt from tax.

2. In case of non-Government employee covered by the Payment of Gratuity Act, 1972 it is exempt from tax to the extent of the least of the following:

   1. 15 days’ salary for each year of service (or part thereof exceeding 6 months);

   2. Rs. 10,00,000; or

   3. Gratuity actually received.

3. In case of non-Government employee (not covered by the Payment of Graft liv Act) it is exempt from tax to the extent of the least of the following:

   1. Rs. 10,00,000;

   2. Half month’s salary for each completed year of service; or

   3. Gratuity actually received.

Pension

Uncommuted pension is taxable in all cases. Commuted pension is fully exempt from tax in the case of a Government employee (i.e.. an employee of the Central Government, State Government, local authority and statutory corporation).

In the case of non-Government employee, commuted pension is exempt to the extent given below —

1. 1/3 of normal pension is exempt if the employee receives gratuity; or

2. 1/2 of normal pension is exempt from tax if the employee does not receive gratuity.

Pension under new pension scheme in the case of a Government employee or any other employee joining on or after January 1, 2004 .

1. Employer’s contribution is first included in salary and then a deduction is available (to the extent of 10 % of salary) under section 80CCD.

2. Employee’s contribution is deductible under section 80CCD to the extent of 10 % of salary.

3. When pension is received out of the aforesaid amount, it will be taxable in the year of receipt.

Annuity from employer

Taxable as salary.

Annual accretion to the credit balance in recognized provident fund

1. Excess of employer’s contribution over 12% of salary is taxable.

2. Excess of interest over notified interest is taxable (notified rate of interest is 9.5 % ).

Retrenchment compensation

Exempt from tax to the extent of least of the following:

1. Amount calculated under section 25F(b) of the Industrial Disputes Act; or

2. An amount specified by the Government (i.e., Rs. 5,00,000).

When compensation is paid under any scheme approved by the Central Government, these limits are not applicable and the entire amount is exempt.

Remuneration for extra duties

Fully taxable under section 15.

Compensation received under Voluntary Retirement Scheme (VRS)

Exempt up to Rs. 5 lakh, if a few conditions are satisfied.

One of the conditions is the amount payable on account of voluntary retirement or voluntary separation of the employees does not exceed

1. the amount equivalent to 3 months’ salary for each completed year of service, or
2. salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. (Relief under Section 89 is not available. )

Salary from UNO

Not chargeable to tax.

Salary received by a Teacher / Researcher from a SAARC member State

Not Taxable up to 2 years